The euro crisis is dire indeed—but Paul Krugman can’t help seeing the gallows humor in it. “As one rescue plan after another falls flat, Europe’s Very Serious People just keep looking more and more ridiculous,” he writes in the New York Times. The core of the problem is reminiscent of the cyclical song “There’s a Hole in My Bucket”: Concerned about a possible default, investors want high interest rates on Italian debt. Those high interest rates, in turn, increase the odds of default.
In other words, “fears of default” are “threatening to become a self-fulfilling prophecy." One solution would be to create a fund capable of vast lending to Italy. Here we run into another “vicious circle”: Such a fund would need backing from European governments—and Italy is one of those. The key problem: “The whole euro system was designed to fight the last economic war” of the 1970s, “when the real danger is a replay of the 1930s,” Krugman notes. “The bitter truth is that it’s looking more and more as if the euro system is doomed." Click through for the full column. (More Europe stories.)
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